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Business support unit mis-treatment claims: are lenders entitled to act in their own interests?

PAG vs RBS

The eagerly anticipated judgment in Property Alliance Group Limited v Royal Bank of Scotland Limited [2016] (PAG v RBS) was handed down on 21 December 2016, finishing what was an eventful 2016 for claims against banks. 

In dismissing all claims against RBS, the High Court considered allegations of SWAPs mis-selling and LIBOR rigging and allegations concerning PAG's alleged treatment by RBS's then Global Restructuring Group (GRG). The judgment is a largely helpful one for lenders. Read our separate analysis on the SWAPs and LIBOR claims

GRG has been the subject of much press coverage since November 2013 and of a Section 166 Review carried out by the Financial Conduct Authority. This is the first significant judicial decision to deal directly with some of the allegations regarding GRG's treatment of customers and, as such, is of interest to both lenders and their customers. 

Background of claims against GRG

In recent years, a growing number of complaints and claims have arisen from the perceived mistreatment of business customers whilst managed by the restructuring or support divisions of banks. The catalyst was the publication in November 2013 of the Tomlinson Report, commissioned by the Department of Business Innovation and Skills, which claimed to have investigated how distressed businesses were being treated by lenders. 

Although focused mainly on the alleged actions of GRG (denied by RBS), the allegations made in the Tomlinson Report are potentially applicable to a wide range of banks who, like RBS, transferred business customers into restructuring or support units when exhibiting signs of financial distress. 

Facts of case

The Property Alliance Group Limited (PAG) is a property investment and development business operating primarily in the North West of England. At the material time, PAG had c. £85 million of investment and development loan facilities with RBS. In the spring of 2010, the management of these facilities was transferred from the local branch to GRG. 

PAG claimed that its facilities should never have been transferred to GRG and that, once in GRG, it was subsequently mistreated.  Specifically PAG argued that there was: 

  • an implied term that RBS would exercise its rights in good faith and would not perform them in a commercially unacceptable or unconscionable way; and
  • an implied term that, in exercising their powers and discretions in the facility agreements, RBS would do so reasonably, in a commercially acceptable or rational way, in good faith, for a proper purpose, not capriciously or arbitrarily and not in a way that no lender acting reasonably would.  

Rejection of implied terms

The Court's starting point was that there is no general duty of good faith in English contract law. The PAG/RBS banking relationship did not fall into any of the categories of relationship where a duty of good faith would be implied as a matter of course. 

The Court went on to hold that, whilst a term of good faith can be implied based on the presumed intention of the parties, this was not the case as between PAG and RBS.  The fact that the agreements contained standard terms specifically excluding fiduciary or equitable duties on the part of RBS and that the contracts had been negotiated at arm's length by sophisticated commercial parties all indicated to the contrary. Nor was such an implied term necessary for the proper functioning of the loan agreements.  

On an implied term relating to the exercise of RBS's contractual powers, the Court stated that the necessary test was whether the power being exercised requires a party to make some kind of assessment or to choose from a range of options. If so, implying a term that it should not be exercised arbitrarily, capriciously or in an irrational manner was necessary. PAG had argued that the test was met in relation to three distinct areas:

  • RBS's power to obtain up-to-date valuations of the secured properties from time to time. The Court held this was an absolute right of RBS and did not involve any element of discretion or assessment of options. 
  • RBS's power to call for a security review. The Court held that this was a condition precedent to a new facility agreement in 2011 which RBS was under no obligation to provide to PAG and could therefore impose whatever conditions to it that it wished when it extended that facility to PAG. 
  • The internal management of PAG's lending facilities. There was no express term identifying the personnel who would perform the banking services at any specific location. The Court accepted it was perfectly proper for RBS to structure itself internally in any way it wished and that the lack of such an express term was not surprising. The absence of any express term also meant there was nothing to which an additional implied term as argued by PAG could be implied. 

Breach of terms?

It was not necessary for the Court to consider whether any terms had been breached as a result of its rejection of the implied terms, but the Court nevertheless went on to consider the question of breach. 

On the transfer into GRG, the Court rejected PAG's argument that the transfer was irrational or conducted in bad faith. It concluded that there were a number of justifiable reasons for RBS to conclude that GRG's involvement was appropriate, including high loan to value ratios, a concern about liquidity and a limited ability to amortise in circumstances where the facilities were set to expire at the end of 2010.  

The Court also dismissed PAG's claims that the real reason for the transfer to GRG was with a view to extract further fees from PAG and to stifle its complaints about the SWAPS it had entered into, holding that there was no evidence to support such allegations.

What is the impact for lenders? 

It will come as a relief to lenders, although probably not a surprise, that there was no finding of an implied term of good faith in a banking relationship. 

Lenders should also welcome the Court's rejection of an implied term requiring banks to use discretion when exercising contractual rights (for instance, in carrying out valuations or seeking key financial information to test covenants). 

It is clear from the Judgment that the Court focused on the contractual position and acknowledged that a bank is entitled to act in its own interests – something often overlooked by complainants in these types of 'distressed relationship' cases. 

It is also an important reminder to banks to ensure that an effective non-reliance clause is contained within the contract and that the sales process is designed to be consistent with the non-advisory relationship. 

Contributor: Jemma Shanks

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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